 "Praveen Jagwani")
Global momentum has bypassed India for nearly two years, prompting foreign investors to rotate towards Taiwan, South Korea, and China to capitalise on the US-led technology (tech) and artificial intelligence (AI) rally, says Praveen Jagwani, chief executive officer of UTI International. In an email exchange with Samie Modak, Jagwani notes that India’s outlook is strengthening as valuations moderate and long-term fundamentals remain compelling. Edited excerpts:
India is now the biggest underweight in emerging market (EM) portfolios. Why has sentiment turned?
By mid-2025, over 70 per cent of EM funds are underweight in India, nearly 3 per cent below the MSCI EM (Emerging Markets) Index on average. Three factors explain this: India’s relative underperformance, steep foreign outflows, and rotation to North Asia.
The MSCI India Index has lagged broader EM by nearly 15 percentage points in 2025 — the widest gap since 2011. High valuations amplified the underperformance, and foreign portfolio investors (FPIs) sold nearly $11 billion of Indian equities this year, pushing foreign ownership to a 15-year low.
Investors have redirected capital to Taiwan, South Korea, and China, attracted by the US-led tech and AI rally, where earnings visibility is clearer and valuations more appealing.
Are you seeing a decline in investor interest after a year of underperformance?
India has a large base of long-term foreign capital, but tactical investors chase momentum. With India trailing global and Asian EMs for nearly two years, capital has flowed to the world’s hottest trade — the Magnificent 7 — leaving EM equities, and India in particular, on the back foot.
Which EMs are currently attracting the most overseas interest?
South Korea, China, Saudi Arabia, the United Arab Emirates (UAE), and Brazil are leading inflows in 2025. South Korea and China have delivered roughly 60 per cent and 37 per cent year-to-date gains, supported by earnings strength, policy reforms, and sentiment. Saudi Arabia and the UAE see rising equity and foreign direct investment (FDI) inflows, driven by infrastructure spending, diversification plans, and regulatory openness. Brazil has overtaken India in FDI confidence, while South Africa is climbing global FDI rankings.
Which EMs do you prefer?
EMs no longer behave as a single investment block, though allocations are often still structured that way. Cross-border mobility, passive fund dominance, and treating EM as a monolith increase correlations, yet performance dispersion has never been wider.
Structural, policy, and sector-specific factors now outweigh any unified EM narrative — Asia can lag while Latin America rallies, and Poland can surge while Thailand contracts. For investors seeking diversification, the traditional EM basket offers far less insulation than in the past.
India’s valuation premium to EM peers has narrowed. Can it compress further?
India’s premium widened after mid-2021 when China’s real estate crisis lowered Chinese and Hong Kong multiples. Strong inflows into China, Taiwan, and South Korea have narrowed this gap. As Indian earnings continue to improve, valuations can moderate further, allowing an orderly compression of the premium.
India lacks listed AI companies. Is this weighing on investor interest?
Partly. Large listed AI firms have yet to emerge, despite India’s deep talent pool. A pipeline of startups is developing in agritech, medtech, spacetech, and defencetech, supported by Digital India and Startup India. Meaningful companies from these sectors are expected to reach public markets in the coming years.
What is your outlook for Indian markets? Key headwinds and tailwinds?
India’s long-term outlook remains robust. Growth of 6.6–6.8 per cent in 2025-26 positions it as the fastest-growing major economy. Domestic consumption, lifted by a strong monsoon and improving rural demand, continues to drive growth.
Structural tailwinds include a young, increasingly skilled workforce, political stability, policy continuity, supportive reforms, and deepening financialisation. Headwinds remain largely external: Indo-Pacific tensions, global tech corrections, and risk-off cycles. India’s structural strengths outweigh these risks, sustaining its long-term appeal.
What explains recent FPI selling? Do you expect flows to improve?
FPI selling is part of a broader EM derisking trend since 2021. China’s real estate downturn, muted post-pandemic recovery, and extraordinary US tech returns drew capital away from EMs. Russia’s removal from EM indices and recent currency and valuation shifts further encouraged rotation to North Asia. This is not India-specific; as earnings divergence versus EM widens and US tech normalises, foreign inflows should resume.
Is the capital gains tax a major impediment to foreign flows?
No. India’s long-term capital gains rate of 12.5 per cent is competitive, and short-term rates of 20 per cent align with other G20 markets. Most foreign investors focus on macro stability, regulation, repatriation comfort, and policy predictability rather than headline tax rates.
India on pause
- Flight to safety: 70% of EM funds underweight India
- Chasing the heat: India trails EMs; investors flock to US tech/AI
- Eastward tilt: Taiwan, South Korea, China dominate inflows
- Cooling crown: India’s valuation premium is narrowing
- Built to last: Strong growth, policy stability, rising consumption
